Student-recruitment tactics at University of Phoenix blasted by feds

Univ. of Phoenix audit leads to $9.8 mil fine

Dawn Gilbertson The Arizona Republic Sept. 14, 2004 12:00 AM

A government review of the University of Phoenix, the country's largest for-profit university, paints a picture of a school so hungry to enroll new students that it has threatened and intimidated its recruitment staff in meetings and e-mail, pressured them to enroll unqualified students and covered up its practices to deceive regulators.

In a 45-page report obtained by The Arizona Republic, the U.S. Department of Education describes corporate culture overly focused on boosting enrollment. The review, based on site visits and interviews with more than 60 employees and former employees, led to the largest settlement of its kind last week. The Phoenix-based university agreed to pay $9.8 million without admitting any wrongdoing. The report did not address the University of Phoenix's educational quality.

Todd Nelson, chairman and chief executive officer of University of Phoenix parent Apollo Group Inc., called the critical portrait of the school's recruiting practices "very, very unfair" and inaccurate.

"That's not how we do it," he said.

The Program Review Report details several examples of compensation and sales practices the department says range from illegal to unethical to aggressive. Federal law governing financial aid prohibits basing college recruiters' pay on enrollment.

The allegation of hard-sell tactics contrasts with the image the University of Phoenix has cultivated of non-stop demand from working adults who want to better their careers with their employers usually picking up the tuition.

In the report, enrollment counselors interviewed by regulators told of a glassed-in isolation room, called the Red Room, where underperformers were put on display to work the phones under intense management supervision.

A group of San Jose recruiters recalled being told heads would be on a chopping block if its numbers didn't come up; another recruiter said her manager told her she couldn't afford time away from the phone to go to New York for her grandmother's funeral.

Telemarketing and sales are pressure-cooker jobs no matter what the field, but the rules are different when education is being pitched and taxpayer funds are involved. The Department of Education oversees federal financial-aid programs and has strict rules against paying recruiters based on the number of students they enroll. The regulations are in place to protect prospective students from being pressured and taxpayers from potential defaults on student loans. About 60 percent of the school's tuition revenue comes from financial aid.

Regulators said they found several violations of this law at the University of Phoenix as evidenced by the focus on enrollment numbers at the expense of more qualitative job measures. The report ordered changes. The school received the report in February and responded to it before settling.

The Department of Education said the university was in violation because it:

• "Hires its recruiters with the promise of lucrative compensation for success in securing enrollments."

• "Maintains a recruiter evaluation and salary system that provides incentive payments based both directly and indirectly on success in securing enrollments."

• "Provides substantial incentives to its staff to recruit unqualified students and students who cannot benefit from the training offered."

• "Systematically and intentionally operates in a duplicitous manner so as to violate the department's prohibition against incentive compensation while evading detection."

The settlement resolved all issues in the report.

Broad scope

Nelson said the report, which covers September 1998 through the end of February, was based mainly on interviews with a small group of disgruntled employees and former employees, some involved in a lawsuit filed last year against the company and since dismissed. The government says it interviewed more than 60 people. Nelson says the university has about 5,000 enrollment counselors, 3,000 of them in Phoenix.

He said that outside auditors the company hired to review its compensation plans found no violations of the law and that interviews it conducted with employees didn't turn up the problems cited in the report.

The company did change its recruiter compensation plan in June to make it clearer for regulators, Nelson said.

He said the fact that the government settled the probe speaks for itself. "If we were guilty of everything being said in that report, there's no way they'd be willing to reach a settlement or no way they'd be willing to sign a settlement agreement that says there is no admission of guilt," he said.

Nelson suggested the department overstepped its bounds with the scope of its report.

"It talks about things that really have nothing to do with what the (recruiter compensation) law is," he said, adding that it is not illegal, for example, to fire someone for not enrolling enough students.

Susan Aspey, spokeswoman for the Education Department, said it stands by the report: "We are both firm and fair in our administration of the law, and we act in the best interests of the students and taxpayers. This is the largest fine the department has ever imposed on a school."

Industry scrutiny

The critical report and settlement come amid intense regulatory scrutiny on the for-profit education industry, which has enjoyed soaring growth and rich success on Wall Street. Apollo's stock alone is up 11,000 percent in the past decade.

A couple of Apollo's competitors are reportedly under federal investigation involving financial-aid fraud, and their stocks have sunk.

Apollo has remained the star of the industry, especially in Wall Street's eyes, but a few warts have emerged this year. This summer, the University of Phoenix settled two cases with the U.S. Department of Labor over unpaid overtime for approximately $6 million.

Last week, in addition to the $9.8 million settlement for the University of Phoenix, it agreed to pay $4.4 million to settle a long-running audit of its small Institute for Professional Development.

Company executives and Wall Street analysts hailed last week's settlements as removing a cloud hanging over Apollo. Details of the report were not public at the time.

Nelson referred to the negative tone of the report in a conference call with analysts and investors the day the settlement was announced but gave no hint of its harshness.

Asked by an analyst what wrongdoing the Department of Education had found in its review, Nelson said the school's recruiter pay plan wasn't out of compliance; what was flawed was how the school administered it. He said the new compensation plan, which was planned before the government review, resolved those issues.

Misleading practices

The report says school officials took steps to deceive or thwart regulators during the review, which included on-site visits in Arizona and California a year ago.

It says some managers in northern California told certain recruiters with a reputation for being outspoken to take leave or be out of the office during the review. Others told of posted materials ranking employees by enrollment performance coming down in advance of the visit. In one case, a recruiter saved a computer spreadsheet that had been displayed before the visit and showed it to regulators. In another, Monopoly money used in a contest to drum up applications was taken off a bulletin board, the report says.

Overall, some employees interviewed said that an elaborate pay matrix was about "smoke and mirrors" and that the only thing that counted was enrollments.

Rick Knight, 49, of Ahwatukee, left the University of Phoenix last year after about two years as an enrollment counselor. He recalls constant threats about keeping the numbers up. He said he was a star performer in the beginning, receiving a $21,000 raise after eight months for enrolling 89 students in the period. But as the school added hundreds of recruiters, there were too few leads to go around.

Nelson said the school has more leads now than it ever has.

Knight was not among the employees interviewed for the program review, but an overtime claim he filed was among those that launched the Department of Labor investigation.

In late 2002, Knight, who has spent much of his career in sales, said he was sent to the Red Room for six weeks, a process he calls humiliating. He says he quit shortly thereafter.

"I have never had a negative review written up about me in my entire employment until I went there," he said.

Reach the reporter at dawn.gilbertson@arizonarepublic .com or at (602) 444-8617.